Value Creation by Family-Owned Businesses: A Literature Review

By Pradhan, Sudeepta; Ranajee | IUP Journal of Business Strategy, December 2012 | Go to article overview

Value Creation by Family-Owned Businesses: A Literature Review


Pradhan, Sudeepta, Ranajee, IUP Journal of Business Strategy


A family-owned business varies from the other existing forms of business in several ways. There are striking variances in the way family-owned businesses handle the management of business, beginning from management, control, succession planning, goals, risk taking and even the way they treat their employees. These factors affect the profitability and value creation by family-owned businesses. This study is an endeavor to review the extant literature related to family-owned businesses, and to point out the important issues in the Indian scenario.

Introduction

A family-owned business is the oldest form of commercial enterprise. The oldest familyowned business, Kongo Gumi, the Japanese construction company, founded in 578 AD, is still in operation and is currently managed by the 40th generation (Hutcheson, 2007). The largest company in the world, Wal-Mart, is also a family business. These family-owned businesses survive multiple generations, creating value in the economy. Prof. John L Ward, an international expert on family businesses at the Kellogg School of Management, says that "family businesses with effective governance practices are more likely to do strategic planning."

However, there is still a huge debate regarding value creation by family-managed businesses and professionally-managed businesses. In the Indian context where most firms are familyowned or family-managed, the idea of shareholder value creation by these firms becomes even vaguer. The leading global executive search firm, Boyden, issued The Boyden Report (Business Wire, 2007), which focused on talent issues in the emerging markets and examined four groups of Indian executives and non-resident Indians driving indigenous and global growth: (1) The First Generation Entrepreneur (which begins from a strong family and high qualification. These are the best 'home grown' talents, (developed in India and not abroad); (2) The Family Entrepreneur (who has inherited the company); (3) The 'Corporate Crossover' (entrepreneurs who worked abroad till recently); and (4) The Intrapreneur (who exploits commercial opportunities and makes optimum utilization of resources). This classification defines the entrepreneur in a very broad sense.

This study attempts to synthesize the literature related to businesses with a special focus on family-owned business, and family factors affecting firm performance. Issues like succession planning, ownership structure and control, risk-taking propensity, and goals and human resources have been considered in this paper. Value creation by family businesses and the various performance indicators have also been accounted for.

Review of Literature

Business Groups

The study of business group as a separate and distinct theme has emerged in the recent past. Several researchers have come up with an array of definitions of the term. Khanna and Rivkin (2001) defined business groups as "a set of firms which, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action." Later, Khanna and Yafeh (2007) defined business groups as consisting of "independent firms operating across both related and unrelated industries that are bounded together by persistent formal and informal relationships together with varying degrees of outsider participation". Gonenc et al. (2007) added a new dimension to defining business groups and said, "business groups not only include firms that connect each other through intercorporate shareholdings, but also the ownership structure is pyramidal, in the sense that an individual or family may control a listed firm which in turn holds controlling stake of a few more firms, which again have a controlling stake holding of a few other firms and so on. And this pyramidal structure gives rise to distinct ownership relations, cash flows and voting rights". The definition of business groups being so diverse and varied, calls for unity in the same. …

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